Indirect: Figuring a Base Rate

Ok….I’m going to explain this to myself. Below is an note taken from the NIH example Excel spreadsheet for calculating indirect costs.

1. Rate Base Determination: The base is used to allocate Indirect (Overhead/G&A) costs equitably to ALL PROJECTS (Direct, IR&D and Commercial). The base can be direct salaries and wages, direct salaries and wages plus fringe benefits, total direct costs (no exclusions), or modified total direct costs (e.g., total direct costs excluding equipment, total direct costs excluding equipment and subcontract costs in excess of $25,000 per subcontract per project period [as used in this example], etc.). The base an organization chooses to allocate Indirect (Overhead/G&A) costs should result in an EQUITABLE ALLOCATION OF INDIRECT COSTS TO ALL PROJECTS.

For example; if the organization has a mixture of commercial and NIH awards and the commercial is heavy in materials while the NIH awards are heavy in direct salaries and wages, the base should be total direct costs and not just direct salaries and wages. However, if an organization only had NIH awards which are all heavy in direct salaries and wages than the base could be direct salaries and wages.

2. IR&D: It is NIH’s/DHHS’s policy to exclude IR&D costs from the Indrect cost pool and include it in the Indirect cost base, thus, these values include element costs relating to both “Direct” and IR&D activities.

Taking Item 1 first, I’ve extracted the following points:

  • There are four methods for allocating the base. These include:
    1. Direct Salaries and Wages
    2. Direct Salaries and Wages + Fringe Benefits
    3. Total Direct Costs with no exclusions
    4. Modified Total Direct Costs

  • Modified total Direct Costs are calculated by taking the total direct costs excluding equipment, and amount of subcontracts over $25,000). MTDC comes up in F.A.R. (the Federal Aquisition Regulations, and regularly shows up in DOD calculations. The FAR subpart 42.7 discusses indirect rates but, as always, it references the canon, which includes the OMB budget documents A-21 for educational institutions, A-87 for state and local governments and Indian reservations, and A-122 for non-profits.
  • So, as near as I can figure out, you choose which of the four allocation methods by figuring out if you are “heavy” in people, or in materials.

What about the common situation of a start-up organization that has a single funded project? Jim and Gail Greenwood address this question.

We sometimes hear from start-up firms that they don’t have any indirect costs since they will only have this one SBIR project and therefore all of their costs would be direct ones. This likely is not true. Even a one-project company is probably going to be preparing other proposals, keeping time sheets (as required by the SBIR agencies), filing tax reports, doing some schmoozing to improve their chances of a Phase II award, etc—all of these costs suggest that this firm has indirect costs and needs to calculate an indirect rate to bill for them.


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